7 Tips to Play Oversold and Undersold Conditions

Understanding Oversold and Undersold Conditions in Stock Trading

What to do when stock is oversold can be awfully tricky as the market can sometimes be finicky. However, with proper experience and training one can use oversold stock to their advantage. Stock monitoring tools, strategies, and understanding rookie mistakes can all help you make well informed decisions that will help you keep your investments moving and profitable. Train yourself to recognize these trends before you start investing.

Oversold Isn’t Always What it Seems

It’s easy when you’re first starting out trading stocks to see the stock condition of a company rising and think it’s time to buy. This is often a mistake that people who haven’t learned to recognize oversold conditions make. Identifying the difference between oversold and overbought is crucial. Stock trading isn’t something you should do without researching and coaching yourself in how to recognize long term trends and gains. Depending on what tools you’re using there are different ways to recognize oversold stocks.

Investing Based on Your Own Opinions

Many people think that oversold stock is a clear indication that it’s time to buy, which is sometimes true, but keep in mind that the stock, market can be full of surprises. The route you take should be dependant upon what you think the stock’s value should be. If the market is indicating a low value for stock and you feel the stock may raise it might be prudent to sit on it until it rises again. It’s also important to pay attention to the company’s reported earnings.

RSI + Previous Trends

There are two tools you should definitely be using if you’re trading stocks, the RSI and MCAD. Relative Strength Index is the longhand for RSI. This is used to track the rising and falling of different companies and their stock trends. You should be relying on the RSI to inform your opinions over a long period of time. Experience will be one of the best teachers.

When reading a stock’s RSI, an oversold stock is one that’s leaving the low mark below 20. An overbought stock is usually above 70. As mentioned before, these levels fluctuate and a stock’s current condition isn’t always an indicator of its future value.

MACD is Your Friend

The Moving Average Convergence Divergence, also known as MCAD, is another way to determine which stocks are the best targets for investing or selling. You’ll want to pay attention to the stocks you can invest in and wait until it’s rising just before the red. If your current stock is moving down below the red it may be a good time to consider selling. Checking the stock patterns is the best way to determine its worth. If it goes low before reaching the red you should look at its history to see if these drops are typical before they rocket back upward again. You should be using RSI and MCAD since they can both help inform your buying and selling decisions.

Knowing Extremes in Stock Levels

Stocks should be low for a very long time before it’s considered oversold, rather than some sort of fluke in the market. If it’s been low longer than expected, it’s time to take a look at the company and its current earnings. If the earnings and stock value are lower than they’ve ever been before the company may be looking for security. Not selling may still be a risk though, because stock can still go lower when most people consider it oversold.

Strategies of Selling Oversold Stock

Pullback and Mean Reversion strategies are meant to attain company stocks the are typically growing, but occasionally plummet. This is where the market can be unpredictable as mentioned before. Just because stocks drop doesn’t mean they may not bounce back. This is where using these strategies can help you, because if you buy during the plummet you can then resell later. This also means you don’t necessarily want to sell the stocks you have if they suddenly drop but that company has a history of growth after a short drop.

Pullbacks are Often Temporary

A pullback is the the pattern we discussed before. The price falls from its highest point and is considered to only be a temporary decline. This is something to be wary of when making investing decisions as it may make or lose you tons of money. Depending on the stock’s history it maybe be an actual decline.

Mean Revision

Mean Reversion is an idea that stocks usually balance out back to their usual worth, which is a way to inform your buying and selling decisions. This strategy should be used to analyze the stock as well as the company’s earnings.

Evaluate a Company’s Worth.

Since market speculation tends to be awfully subjective it’s important to understand that your reward can sometimes have to do with your comfort level when holding onto stock that others consider oversold. When stock seems to be severely oversold, the reward after it bumps back can be extremely lucrative. If the stock you have has a history of fluctuating it’s likely more safe to assume it will rise again. Oversold stocks have patterns, and it’s important to recognize what those patterns look like in comparison to stocks that tend to be overbought.

Conclusion

In general, stocks can be a very difficult thing to get good at, and the game is full of loss and reward. Stock conditions fluctuate but tend to stay in a pattern that isn’t always reflected by its current RSI or MCAD. Oversold conditions should be bought before reaching the red and sold after. When determining what to do when stock is oversold you should first decide whether it really is oversold by using your tools and opinions of that company and their earnings. Always exercise caution and don’t be too hard on yourself if you make bad investments in the beginning. Investing can take a while to get good at.

Archives

What would you like to know?

What would you like to know?

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 1 other subscriber

Email Address

ABOUT US

Why WealthMaverick.com?
We want to create a singular place online to access practical information on understanding the ramifications of debt with your financial life. We hope you find this site useful and if there is anything we can do to make it better, please let us know.